Lawyers are warning that directors of UK companies could face personal consequences for failing to properly consider climate and nature related risks a company can face.

The warning has been made in a legal opinion piece this month and published by Pollination Group and the Commonwealth Climate Law Initiative (CCLI).

Personal consequences directors could face include being sacked or seeing remuneration packages cut through ‘bad leaver provisions’ in their contracts. ‘Bad leavers’ are those who have been dismissed for reasons including misconduct and fraud or failing to meet performance targets.

They cite a 2016 legal case where it was unsuccessfully alleged two shareholder directors had breached their duties to the company and were obliged to sell their shares for a nominal sum.

“A company may seek to rely on alleged breaches of duty by a director in relation to the company’s nature-related risks to contend that the director is a bad leaver, even where such breaches have not caused the company any financial loss,” the lawyers warn.

“This can have significant financial consequences personally for a director,”

The lawyers add that “we consider that failure by a director to mitigate or properly address the nature-related risks which the company faces can, in certain circumstances, constitute a breach” of their duties.

“Serious consequences” for any breaches could include “substantial claims for damages or compensation”.

In some cases “where it is difficult to quantify the loss the company has suffered”, a director could face “termination of employment, or a challenge to any remuneration or exit package”, they warn.

📢OUT NOW: New UK legal opinion on Nature-Related Risks and Directors Duties.

The opinion finds that directors who fail to adequately consider, manage and disclose nature-related risks can be held personally liable.

Read opinion here: https://t.co/GozKKfz58h#PollinationGroup pic.twitter.com/PzLo3fU90n

— CCLI (@comclimatelaw) March 13, 2024

“We increasingly understand the potential severity of nature-related risks for companies,” said CCLI trustee Professor Thom Wetzer.

“Yet, directors commonly fail to appreciate the severity of these risks and thereby needlessly put their company at risk.

“This important report highlights what should have been obvious long ago: nature-related risks are not distinct from other financial risks, and should therefore be considered by directors in furtherance of their legal duties.”

CCLI executive director and Roscoe C.O’Byrne, chair of law at Indiana University, added: “This legal opinion from eminent barristers gives directors in the UK clarity about their duties to understand and mitigate their company’s exposure to nature-related risk.

"It marks a turning point in understanding the corporate governance implications that arise from nature-related physical, transition and systemic risks, as part of existing financial risk categories.”

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